There are few events that can send a cannabis stock soaring like an investment from big tobacco.
Do you remember what happened on December 7, 2018?
That’s when Altria Group (MO), one of the largest tobacco companies in the world and maker of Marlboro cigarettes, invested $1.8 billion into Cronos Group (CRON), one of the largest cannabis companies in Canada and the world. Investors loved the news, sending shares of Cronos soaring. Cronos proceeded to jump almost 148% in the eight weeks while the rest of the cannabis sector gained 24%. It looks like a similar megadeal is in the works.
Auxly Cannabis Group (XLY, CBWTF) is a mid-sized cannabis company headquartered in Canada.
It has a market cap of $380 million and annual cannabis cultivation capacity of 100K kilos.
Auxly has one of the most unique business models in the Canadian cannabis industry – it calls itself a “streaming cannabis company.” Here’s what that means. Auxly is basically a wholesaling, cultivating and selling cannabis to some of the largest retailers in the industry. In order to meet these supply needs, Auxly owns an impressive portfolio of cannabis cultivation facilities that it expects to produce more than 100,000 kilograms in the next 12 months.
As you can see, Auxly is making big moves to cash in on Canada’s cannabis industry.
Last week, Auxly scored its biggest win ever.
On July 25, Imperial Tobacco (IMBBY), one of the largest tobacco companies in the world, announced it was investing $123 million in a partnership with Auxly.
Here are some more details from the press release.
Auxly Cannabis Group Inc. (XLY) (CBWTF) (“Auxly“), an international cannabis company, today announced that Imperial Brands PLC (“Imperial Brands“) will invest approximately $123 million in Auxly by way of a convertible debenture and grant Auxly global licenses to Imperial Brands’ vaping technology and access to its vapor innovation business, Nerudia (the “Transaction“).
As part of the Transaction, Imperial Brands will grant Auxly global licenses to its vaping technology for cannabis use and access to its vapor innovation business, Nerudia. The shared ability to rapidly innovate as the Canadian market evolves is key to future growth and Auxly will work closely with a small dedicated team from Nerudia in developing a portfolio of new and enhanced vapor products and brands.
Upon completion of the Transaction, Auxly will:
- Receive an immediate capital injection of approximately $123 million to continue to execute on its strategic objectives and capitalize on emerging growth opportunities;
- Obtain rights to Imperial Brands’ industry-leading vaping technology and intellectual property for cannabis use globally;
- Be granted access to Imperial Brands’ vapor innovation business, Nerudia, which has a growing team dedicated to cannabis research and a facility that is already licensed for research and development activities with cannabis;
- Become Imperial Brands’ exclusive partner for the future development, manufacture, commercialization, sale and distribution of cannabis products of any kind anywhere in the world; and
- Further strengthen its governance through the addition of one director nominee and one non-voting observer to Auxly’s Board of Directors, each to be designated by Imperial Brands.
Here’s a link to the full press release if anyone wants to take a look.
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What This Deal Means for Auxly
#1 – $123 Million Cash Injection
Auxly will use this injection of cash to accelerate its growth rate.
#2 – Imperial’s Global Distribution Network
Imperial is a powerful brand backed by billions of dollars, millions of customers, and a global distribution network. The partnership creates a huge opportunity for Auxly to piggyback on that network.
These are two powerful, long-term forces that tell me Auxly just became a cannabis stock that investors need to keep a close eye on. In the short run, I expect shares of Auxly to get a big boost.
Auxly is Down 80% from the All-Time High
Unfortunately, Auxly has been trending lower since early 2018, falling more than 80% from the all-time high.
I don’t think this means the company is doomed or the business model is broken. This looks like an opportunity to invest in a cannabis stock that has been out of favor on the back of a big fundamental driver.
More recently, shares surged higher when news of the Imperial deal hit the wire.
Looking forward I expect the new partnership to keep fueling shares for the next few months.
The Big Picture
Auxly is a mid-sized cannabis company with a unique business model.
Shares have been out of favor for the last 18 months, currently trading near the 52-week low. The new partnership with Imperial looks like a major catalyst and I expect it to drive shares up for the next few months.
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